Magazine

How the Widget Was Won

November 11, 2007

The decline of the North American contract-manufacturing sector was driven home on Oct. 1, when Singapore's Flextronics International (FLEX) closed its $3.6 billion purchase of Solectron, the onetime largest U.S. electronics manufacturer, based in Milpitas, Calif. Like other companies that sprang up in the 1990s to build PCs, telecom equipment, and other gear for brand-name companies, Solectron got clobbered by Asian competitors, such as Flextronics and Taiwan's Hon Hai Precision Industry, which have lower costs for labor, electricity, and land.

Between 2000, just before the dot-com crash, and 2006 Solectron's sales fell from $14.1 billion to $10.6 billion. Hon Hai, with the bulk of its factories in mainland China, has posted annual revenue increases of 50% in recent years, reaching $40 billion in 2006.

Several of the remaining U.S. manufacturers are losing money. Now their hopes rest on industries that haven't yet farmed out their factories, such as medical devices, aerospace parts, and auto components. While about 60% of PC and telecom manufacturing is contracted out, only 7.8% of auto-components work is, says researcher iSuppli.

Already, Sanmina-SCI (SANM) of San Jose gets about 16% of its $10.4 billion in revenues making goods for the likes of Royal Philips Electronics' (PHG) medical unit and auto supplier Valeo. That's up from 13% the prior year.

But expanding into new lines isn't as easy as flipping a switch. To serve new medical and aeronautics customers, Celestica (CLS), an $8.8 billion manufacturing and design company based in Toronto, had to redesign factory lines, and workers learned to handle many new parts and materials. Because orders might call for just a few hundred or even a few dozen of a product instead of thousands, factories have to cope with frequent stopping, starting, and retooling, says Peter Lindgren, senior vice-president at Celestica.

Even as U.S. companies branch out, the Asians aren't far behind. Flextronics also is buying Avail Medical Products, a small Fort Worth (Tex.) contractor specializing in surgical blades, biopsy needles, and catheters.